Spring Budget 2023: Capital allowances changes

In his Spring Budget the Chancellor sought to boost investment through changes to the capital allowances regime.

The background to the announcement was that the headline rate of corporation tax is confirmed to rise from 19% to 25% from 1 April 2023. Additionally, the super deduction scheme, which granted capital allowances at 130% on qualifying capital expenditure, will expire on 31 March 2023. Looking at ways to encourage companies to continue to invest in capital infrastructure, two major changes were announced:

Full Expensing

Full expensing will allow companies to claim 100% of the cost of certain plant and machinery against profits in the year of expenditure, effective from 1 April 2023 to 31 March 2026. This applies to spending on plant and machinery which goes into the capital allowances main pool. This excludes cars and items classed as integral features within buildings, or special rate pool assets such as certain long-life assets.

Expenditure on integral features or other special rate pool assets will instead qualify for first year allowances at a rate of 50%. This again applies to expenditure incurred between 1 April 2023 and 31 March 2026. The remaining balance of the expenditure will written off at a rate of 6% per year.

Full expensing and the 50% first year allowance will only apply to companies. Partnerships and trading LLPs, and sole traders, will continue to claim allowances under the present rules.

£1M Annual Investment Allowance

In his Autumn Statement the Chancellor had set the Annual Investment Allowance (“AIA”) at £1m permanently. As the AIA applies to both main pool assets and special rate assets today’s announcement will only apply in effect to companies spending in excess of £1m a year on capital equipment etc, although this £1m ceiling needs to be shared between companies within a group and companies under common control where there are shared activities.

Whilst the Chancellor estimates these measures will provide a £9 billion a year cut in corporation tax, they are likely to be of limited benefit to many small and medium sized enterprises who would be within the AIA limit so will be worse off after the increase in the corporation tax rate and the withdrawal of the super deduction.